In law, like baseball, the fundamentals are, well, fundamental. Piercing the corporate or LLC veil is tough to do in Maryland, if you cross the proverbial “Ts” and dot the “Is”. A new Court of Special Appeals case reiterates this point. In Serio v. Bayside Properties, LLC, _____ Md.App. ___ (January 25, 2013), the court refused to hold the sole member of a single member LLC liable for LLC obligations. In theory, an LLC can be set aside upon a finding of fraud or to “enforce a paramount equity.” The circuit court found no fraud but decided that “fundamental fairness” dictated that the sole owner of the LLC be liable for the LLC obligation debts. The appellate court reversed, dismissing the creditor’s “alter ago” claim.
LLCs, like corporations, work well to insulate risky assets from other assets. They also are great ways to structure gifts without needing to give up control – either through retaining a majority holding or, better still, capitalizing the LLC in a way to provide for voting and non-voting membership interests.
What a sole member LLC entity will not do, however, is insulate that asset from satisfying the sole member’s creditors. The asset protection afforded by entities to protect assets from the member’s or partner’s creditors only works if non-debtor members or partners would also be affected. This is because the rule exists to protect the innocent. Thus, for the entity to protect an asset from a member’s or partner’s creditors there must be other members or partners. In those circumstances, the asset held by the LLC or partnership will not be sold. [The membership or partnership interests, however, could be subject to a charging order or, in some circumstances, sold] The Serio case, on the other hand, spoke to insulating the LLCs debts from the owner. If done properly, the owner is not obligated for the debts of the LLC.
The fundamentals are important. As Earl Weaver noted, however, you need a little bit more than just the fundamentals (“three run homers”). Similarly, asset protection planning needs to use the fundamental building blocks in a way that yields the planned result.